BARRIERS TO EFFICIENCY AND THE PRIVATIZATION OF TOWNSHIP-VILLAGE ENTERPRISES

maximization program is given by:

= ,max {pY'j - wlj - ^rmj : Yj ≤ ^f (^lj^,mj^,Kj)^{, wl}j ^{+ rm}j ≤ Ej^, Yj ≤ Yj^{, l}j ≤ ^lj} ^,
lj,mj,Yj

(2)

where Yj is the output target and lj is the minimum labor employment goal, j =1, 2.

2.2 Local Government Preferences

Those familiar with the structure of Chinese townships and villages know that local govern-
ments were very much involved in the affairs of TVEs and exercised much control over them
(Chang and Wang, 1994; Naughton, 1994; Bowles and Dong, 1999). Ho (1994) suggests that
during the 1980s, the relationship between LGs and TVEs were quite similar to that between
SOEs and the central or provincial government during the pre-reform days. As discussed
in section 2, local governments were concerned with increasing its own revenue, increasing
rural income, creating non-farm employment, and increasing output productivity (Whiting,
1996; Jin and Qian, 1998).

Local government revenues R come from two major sources: (i) taxes on TVE and
PE output and/or profit, and (ii) fixed administrative fees imposed on TVEs and PEs, and
(typically fixed) fees collected from agricultural production. Since revenues of the second type
are essentially lump-sum, we assume R is a function of π ₁ and π₂ .Non-farmemployment,
denoted L = l₁ + l₂, is the sum of labor hired by the two firms. Similarly total output,
denoted Y = Y1 + Y2, is the sum of output produced by both firms. Farmer income comes
from two sources: revenue from the agricultural production and revenue from the non-farm
employment. In our analysis, we assume the LG assigns little value to the agricultural
income component of farmer income. The LG is interested in the level of non-farm income,
and proxy non-farm income by the units of labor employed by the TVE and PE. Hence,
according to the above discussion, it is reasonable to represent the LG’s preference by the

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